Impairment of Assets Test

IMPAIRMENT OF ASSETS
The following information relates to Q1 & Q2.
Information about three assets are given below in the table:

Aldo Balbo Casco
Value in Use $150,000 $195,000 $105,000
Carrying Amount $90,000 $140,000 $112,000
Net Realizable Value $115,000 $136,000 $85,000
Q1. What are the recoverable amounts of each asset? (MCQ)

Aldo ($115,000), Balbo ($136,000), Casco ($105,000)
Aldo ($150,000), Balbo ($136,000), Casco ($105,000)
Aldo ($150,000), Balbo ($195,000), Casco ($105,000)
Aldo ($115,000), Balbo ($195,000), Casco ($85,000)
(2 marks)

Q2. What are the impairment losses on each asset? (MCQ)

Aldo ($0), Balbo ($0), Casco ($0)
Aldo ($0), Balbo ($55,000), Casco ($20,000)
Aldo ($25,000), Balbo ($4,000), Casco ($7,000)
Aldo ($0), Balbo ($0), Casco ($7,000)
(2 marks)

Q3. A cash-generating unit has the following assets:

Building $600,000
Plant & Machinery $100,000
Goodwill $80,000
Inventory $50,000
Total $830,000

One of the machines valued at $60,000 has been damaged & will be scrapped. The total recoverable amount estimated from the cash-generating unit is $470,000. What is the recoverable amount of the current assets after the impairment loss? (MCQ)

$21,800
$28,000
$33,500
$50,000
(2 marks)

Q4. Which of the following correctly defines the recoverable amount of an asset? (MCQ)

Current market value of the asset less cost of disposal
Higher of fair value less cost of disposal & value in use
Higher of carrying amount & fair value
Lower of fair value less cost of disposal & value in use
(2 marks)

Q5. An asset has a carrying amount of $55,000 at the year-end 31st March 2002. Its market value is $47,000 having a disposal cost of
$3,500. A new asset will cost $85,000. The company expects that the asset will generate $19,000/per annum of cash flows for the next three years. The cost of capital is 8%. What is the impairment loss to be recognized for the year end 31st March 2002? (FIB)
3613151270000$
(2 marks)
Q6. Which of the following are internal indications of impairment? (MRQ)

A fall in the market value of a machine due to inflation
The management realized that an asset is unable to produce up to its full capacity
A report prepared by the warehouse manager than one of the lifter cars has crashed into a wall
The development of intention of management to sell the asset during the next 3 months
(2 marks)

Q7. Moby had purchased an asset on 1st September 2009 at a cost of $500,000 with the useful life of ten years with no cash inflow at the time of disposal. The asset has been depreciated until 31st October 2014.
At that date, an accident occurred which resulted in the damage of the asset & an impairment test was taken by Moby. On 31st October 2014, the fair value of the asset was $160,000 with $10,000 cost of disposal. The expected future cash flows were $13,000/annum for the next five years. The cost of capital is at 10% with five-year annuity factor of 3.79. Calculate the impairment on 31st October 2014? (MCQ)

$0
$100,000
$150,970
$200,730
(2 marks)

Q8. A cash-generating unit has the following assets:

Property & Plant $400,000
Machinery $90,000
Goodwill $75,000
License $5,000
Net Assets (realizable value) $30,000
Total $600,000

The company had breached a government legislation which results in its cash-generating unit value to fall by $200,000. What will be the value of Property & Plant after the impairment? (MCQ)

$101,010
$126,316
$266,667
$298,990
(2 marks)

Q9. Which of the following is not an indicator of impairment? (MCQ)

The NRV of inventory has reduced due to damages but carrying amount is still lowered it’s than NRV
Technological advancement has boomed in a country resulting old machinery becoming obsolete
Cost of capital of a company has increased due to increase in market rates
The carrying amount of an asset is higher of the recoverable amount of an asset
(2 marks)

Q10. A company purchased an asset on 1st January 2000 costing $2.1 million and its life was 10 years. On 31st December 2001, the fair value of the assets was $1.9 million. On 31st December 2002, the recoverable amount of the asset was $0.7 million. Calculate the impairment loss to be recorded in Profit ; Loss account on 31st December 2002? (FIB)

3613151270000$
(2 marks)

Q11. A cash-generating unit has the following assets:

Building $409,050
Plant ; Machinery $311,000
Goodwill $30,500
Inventory $156,000
Total $906,550
One of the plants valued at $91,000 was destroyed ; will be scrapped. The total recoverable amount estimated from the cash-generating unit is $760,050. What is the recoverable amount of the Plant ; Machinery after the impairment loss? (FIB)
3613151270000$
(2 marks)

Q12. Meagan had purchased an asset on 1st September 2015 at a cost of $300,000 with the useful life of six years with no residual value. The asset has been depreciated until 31st October 2020.
At that date, the asset was damaged ; an impairment test was taken by Moby. On 31st October 2020, the fair value of the asset was $60,000 with a $3,000 cost of disposal. The expected future cash flows were $16,000/annum for the next five years. The cost of capital is at 13% with five-year annuity factor of 3.52. Calculate the impairment on 31st October 2020? (MCQ)

$0
$680
$6,320
$7,000
(2 marks)

Q13. A delivery van has a carrying amount of $39,000 at the year-end 31st March 2016. Its market value is $33,800 having a disposal cost of $1,250. A new delivery van will cost $46,500. The company expects that the van can generate $9,300/per year of cash flows for the next four years. The cost of capital is 5%. What is the impairment loss to be recognized for the year end 31st March 2016? (MCQ)

$1,250
$5,200
$6,022
$6,450
(2 marks)

Q14. ZZZ Co purchased a non-current asset on 1st January 2012 costing $3.75 million and its life was eight years. On 31st December 2013, the fair value of the non-current asset was $2.95 million. On 31st December 2014, the recoverable amount of the asset was $1.25 million. Calculate the impairment loss to be recorded in Profit ; Loss account on 31st December 2014 nearest to $000? (FIB)

3613151270000$ 000
(2 marks)

IMPAIRMENT OF ASSETS (ANSWERS)
Q1. C

Recoverable amount is the higher of the Value in Use or the Net Realizable Value.

Q2. D

Impairment loss = Carrying amount – Recoverable amount = Positive (+)
Aldo = $90,000 – $150,000 = (-$60,000) No Impairment
Balbo = $140,000 – $195,000 = (-$55,000) No Impairment
Casco = $112,000 – $105,000 = $7,000 Impairment

Q3. D
Assets which have their own impairment criteria do not fall under the scope of IAS 32 -Impairment of asset. Inventory is impaired under IAS 2 – Inventory where it is calculated by choosing lower of Cost or Net Realizable Value.
Q4. B
Q5. $6,037

Value in Use
Cash Flow Discount Factor 8% Present Value
19,000 0.926 $17,594
19,000 0.857 $16,283
19,000 0.794 $15,086
Total PV $48,963
Fair Value less Cost to sell = $47,000 – $3,500 = $43,500
Higher of = $48,963
Impairment Loss = $55,000 – $48,963 = $6,037

Q6.

A fall in the market value of a machine due to inflation (External indication)
The management realized that an asset is unable to produce up to its full capacity (Internal indication)
A report prepared by the warehouse manager than one of the lifter cars has crashed into a wall (Internal indication)
The development of intention of management to sell the asset during the next 3 months (Internal indication)

Q7. B

Carrying Amount = (500,000 × 5/10) = 250,000
Fair value less cost to sell = (160,000 – 10,000) = 150,000
Value in use = (13,000 × 3.79) = 49,270
Recoverable amount $150,000, Impairment = 250,000 – 150,000 = $100,000

Q8. D

The total impairment of CGU is $200,000
The goodwill is impaired by $75,000 leaving $125,000 of impairment to be allocated to other assets.
Total of assets to be impaired is $495,000 (400 + 90 +5)
Impairment = (400,000 ÷ 495,000) × 125,000 = 101,010
Fair Value after impairment = 400,000 – 101,010 = $298,990

Q9. A
The NRV of the inventory is still greater than its carrying amount so no impairment has arisen
Q10. $742,500

Calculation done in $000
Cost = 2,100
Depreciation = (2,100 × 2/10) = 420
Carrying amount (After 2 years) = 2,100 – 420 = 1,680
Revaluation of asset = 1,680 1,900 = 220 in Revaluation Reserve
New Cost = 1,900
Depreciation = (1,900 × 1/8) = 237.5
Carrying amount (After 1 year) = 1,900 – 237.5 = 1,662.5
Impairment loss = 1,662.5 – 700 = 962.5
Reversal of Revaluation Reserve = $220
Excess recorded in Profit ; Loss account = 962.5 – 220 = $742,500

Q11. $211,257

The total impairment of CGU is $146,500
The goodwill is impaired by $30,500 leaving $116,000 of impairment to be allocated to other assets. The plant is impaired by $91,000 leaving $25,000 of impairment
Total of assets to be impaired is $629,050 (409,050 + 311,000 – 91,000)
Impairment = (220,000 ÷ 629,050) × 25,000 = 8,743
Fair Value after impairment = 220,000 – 8,743 = $211,257

Q12. A

Carrying Amount = (300,000 × 1/6) = 50,000
Fair value less cost to sell = (60,000 – 3,000) = 57,000
Value in use = (16,000 × 3.52) = 56,320
Recoverable amount $57,000, Impairment = 50,000 – 57,000 = $0

Q13. C

Value in Use
Cash Flow Annuity Factor 5% (1-4) Present Value
9,300 3.546 $32,978
Total PV $32,978
Fair Value less Cost to sell = $33,800 – $1,250 = $32,550
Higher of = $32,978
Impairment Loss = $39,000 – $32,978 = $6,022

Q14. $1,071,000

Calculation done in $000
Cost = 3,750
Depreciation = (3,750 × 2/8) = 937.5
Carrying amount (After 2 years) = 3,750 – 937.5 = 2,812.5
Revaluation of asset = 2,812.5 2,950 = 137.5 in Revaluation Reserve
New Cost = 2,950
Depreciation = (2,950 × 1/6) = 491.67
Carrying amount (After 1 year) = 2,950 – 491.67 = 2,458.33
Impairment loss = 2,458.33 – 1,250 = 1,208.33
Reversal of Revaluation Reserve = 7.5
Excess recorded in Profit ; Loss account = 1,208.33 – 137.5 = $1,070,830
Nearest to $000 = $1,071,000